Disadvantages of Stock Repurchases

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Question

Which of the following is/are disadvantages of stock repurchases?

I. If investors are not indifferent between dividends and capital gains, regular repurchase programs could drive them away.

II. The IRS could tax the firm for improper accumulation of capital gains if it felt regular repurchase programs had taken the place of dividends.

III. The firm might end up paying a higher than fair price if it commits to a repurchase program.

Answers

A. II & III

B. I & III

C. III only

D. II only

E. I only

F. I, II & III

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Explanations

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A. B. C. D. E. F.

If shareholders are not indifferent between dividends and capital gains, the stock price might increase more with dividends. This is because cash dividends are generally made very regularly, while stock repurchases are irregularly made. Although this has been rarely done for public corporations, the IRS can impose a tax if it believes regular repurchases are being made to avoid paying dividends. If a company's shares are thinly traded, and the firm wishes to repurchase a large number of shares, it could bid up the stock price above the equilibrium price and overpay for the shares.

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